For many years, institutional investors and hedge funds alike have made big returns by selling short stocks during periods when stock prices in general were falling.
They do this by selling short, that is, by borrowing stocks and immediately selling them at inflated prices, and then buying them back once they have fallen in price.
Yet many of these same money managers repeatedly tell individual investors to stay fully invested in the financial markets and to regularly add to their mutual fund accounts — regardless of whether stock prices are rising or declining.
These same money managers have also told investors to employ dollar-cost averaging — buying more of a stock or mutual fund when the security falls in price.
Yet dollar-cost averaging is a fool's game. Investors can significantly increase their long-term investment returns by avoiding big downturns in the equity markets.
For example, if you had held $10 in a cash-like account (like a bank CD or money market fund) during the U.S. stock market's 30 worst-performing months from the end of 1927 to 2005, but then invested those funds in stocks (the S&P 500) during all other periods throughout this span, your $10 would have grown to $1,890,218.
If, on the other hand, you had held $10 in cash during both the 30 best-performing and the 30 worst-performing months during this same period, but invested those funds in stocks during all other periods, your $10 would have grown significantly less, to just $26,619.
In comparison, that $10 invested continuously in the stock market throughout that period from 1927 to 2005 — what's known as a buy and hold strategy — would have grown less still, to only $15,717.
Beginning in July of this year, I began warning my readers that stock prices in general were showing signs of topping and that stock prices would likely begin trending lower during the fourth quarter of this year.
On Oct. 2, I wrote an article titled "Economic Slowdown Almost Certain," in which I stated that the recent slowdown in non-residential construction spending and the slowing manufacturing sector would likely lead to a big drop in economic growth over the coming months.
Since then, I've repeatedly warned our readers to ignore the Wall Street cheerleaders and to instead exit the equities market. And, I've advised subscribers to our new investment newsletter, The ETF Strategist, to invest in ETFs that sell stocks short — just like the pros do when stock prices in general seem poised for decline.
Well, guess what? As of yesterday's close, the S&P 500 had generated a negative 3.4 percent return since we issued the first edition of The ETF Strategist on Sept. 18.
Yet the ETFs we recommended to conservative investors have returned 6 percent since Sept. 18, while those ETFs recommended to aggressive investors have returned 7.4 percent.
Sure, these investment returns are nothing to shout about, but subscribers who've followed our advice in The ETF Strategist have been able to avoid the recent downturn in stock prices. By doing so, they'll have more capital to put to work when stock prices bottom and the next bull market begins.
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